You are auditing the December 31, 2018, financialstatements of Atlantic, Inc., a manufacturer of water toys. Duringyour inspection of the company garage, you discovered that a usedtruck not listed in the equipment subsidiary ledger is parkedthere. You ask the plant manager, about the vehicle, and she tellsyou that the company did not list the truck because the company wasonly leasing it. The lease agreement was entered into on January 1,2018, with Rent-a-Truck Center. You decide to review the leaseagreement to ensure that the lease should be afforded operatinglease treatment, and you discover the following lease terms.

1. The lease has a 5 years term.

2. Rental of $5,680 per year (at the beginning of eachyear).

3. Estimated economic life of the truck is 7years.

4. Atlantic’s incremental borrowing rate is 10% peryear.

Instructions:

You are a senior auditor writing a memo to yoursupervisor, the audit partner in charge of this audit, to discussthe above situation. Please write a one-page memo to answer thefollowing questions:

1) Identifies the problems and relatedissues.

2) Do you need any additional information to makedecision regarding the type of the lease? Please make assumption(s)and discuss how the alternative assumption(s) may affect the leaseclassification.

3) Based on your assumption(s), how would you advisedyour client to account for this lease? Explain every journal entrythat you believe is necessary to record this lease properly on theclient’s book